Energy East Corporation v. U.S., (CA Fed Cir 6 3/20/2011) 107 AFTR 2d ¶2011-962
The U.S Court of Appeals for the Federal Circuit, affirming the Court of Federal Claims, has held that interest netting wasn't available for interest on a parent corporation's deficiency and interest on overpayments made by two of its subsidiaries. The Court reasoned that because the subsidiaries were separate and different taxpayers wholly unrelated to the parent corporation when the underpayment was due and when the overpayments were made, they weren't the “same taxpayer” as required under Code Sec. 6621(d), the provision allowing interest netting.
Background. Code Sec. 6621(a)(1) establishes the interest rate for overpayments, and Code Sec. 6621(a)(2) establishes the interest rate for underpayments. Under Code Sec. 6621(d), to the extent interest is payable for any period under Code Sec. 6601 (imposing interest on underpayments) and allowable under Code Sec. 6611 (paying interest on overpayments) on equivalent underpayments and overpayments by “the same taxpayer,” the net rate of interest under Code Sec. 6621 on the underpayment and overpayment amounts is zero for the overlapping period.
“Taxpayer” is defined as “any person subject to any internal revenue tax.” (Code Sec. 7701(a)(14)) “Person” includes a corporation. (Code Sec. 7701(a)(1))
Facts. Energy East Corporation (Energy East) and its subsidiaries, Central Maine Power Company (CMP), and the Rochester Gas & Electric Corporation (RG&E), were separate and unrelated taxpayers during the’95,’96,’97, and’99 tax years. Energy East acquired CMP in 2000 and RG&E in 2002. Before the acquisitions, CMP had overpaid its taxes for’95,’96, and’97; RG&E had overpaid its tax for’96 and’97; and Energy East had underpaid its taxes for’99. Energy East filed suit in the Court of Federal Claims to recoup $2,715,007 of interest in connection with the overpayments by CMP and RG&E and the underpayment by Energy East. Both Energy East and IRS moved for summary judgment on the issue of whether interest should be netted.
Court of Federal Claims decision. The Court of Federal Claims held that because Energy East and its subsidiaries weren't the same taxpayer when they made the overpayments and underpayments, they weren't entitled to interest rate netting under Code Sec. 6621(d). Under Code Sec. 6621(d), interest rates may be netted only on equivalent underpayments and overpayments “by the same taxpayer of tax.” The Energy East corporation that underpaid its taxes in’99 was not the “same” taxpayer as either the CMP corporation that overpaid its taxes in’95,’96, and’97, or as the RG&E corporation that overpaid its taxes in’96 and’97. These entities were neither “identical” nor “without addition or change.” Rather, the subsidiaries were changed when their parent corporations were acquired by Energy East in 2000, giving them the ability to form a consolidated group. Because Energy East later acquired RG&E and CMP and filed consolidated tax returns for all three corporations, the three corporations didn't lose their status as separate taxpayers or retroactively acquire a status as one and the same taxpayer for the tax years before their joining the group.
Court of Appeals affirms. The Federal Circuit concluded that Energy East couldn't net the interest from its underpayment with the interest from its subsidiaries' overpayments because it wasn't the same taxpayer as its subsidiaries at the time the payments were made. Code Sec. 6621(d) requires that taxpayers be the same when the overpayments and underpayments are made.
The Court rejected Energy East's claim that a “reasonable” interpretation of Code Sec. 6621(d) should allow interest netting if the parent and subsidiary file consolidated returns when the netting claim is made. The Court found that the language of Code Sec. 6621(d) clearly provides an identified point in time at which the taxpayer must be the same—i.e., when the overpayments and underpayments are made. Energy East chose to ignore the plain language of the statute, and instead proposed an erroneous interpretation that rested on a limited reading of the statute and unnecessary reliance on the legislative history. In analyzing Code Sec. 6621(d), the Court found nothing in the legislative history that supported Energy East's interpretation.
The Court also rejected Energy East's contention that Code Sec. 6621(d) allowed interest netting for the period when the corporations file consolidated returns and interest was accruing on their respective overpayments and underpayments—i.e., that because the period of its underpayment overlapped with the period of its subsidiaries' overpayment after consolidation, Code Sec. 6621(d) allows interest netting. CMP's and RG&E's overpayments were made in’95-97, and Energy East's underpayment was made in’99—all of which occurred before Energy East's acquisition of CMP and RG&E. These underpayments and overpayments weren't made by the “same taxpayer,” and so couldn't be attributed to Energy East.
References. For zero net interest rate in the case of overlapping underpayments and overpayments, see FTC 2d/FIN ¶V-1301.1; United States Tax Reporter ¶66,214; TaxDesk ¶851,008; TG ¶71563.